PS09 - EC340 Spring2011 ProblemSet9 1.

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EC 340 Spring 2011 Problem Set 9 1. Suppose that there are two countries in the world (the U.S. and Europe) and that long run money demand in each country is given by the following two equations: ݉݋݊݁ݕ ݀݁݉ܽ݊݀ ܷ. ܵ.: ܲ ௎ௌ ܻ ௎ௌ 3 ݉݋݊݁ݕ ݀݁݉ܽ݊݀ ܧݑݎ݋݌݁: ܲ ܻ 4 Further suppose that real income in the U.S. is 14, real income in Europe is 7, the U.S. money supply is 8 and the European money supply is 3. Use the quantity theory of money combined with purchasing power parity to derive the equilibrium long run exchange rate between the U.S. dollar and European euro. 2. Suppose that there is an unexpected one time, permanent reduction in the U.S. money supply. Show in a series of diagrams, each with time on the horizontal axis, the paths taken by the following variables: The U.S. money supply The U.S. price level The U.S. interest rate The spot exchange rate (dollars per unit of foreign currency) 3.
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This note was uploaded on 11/11/2011 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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PS09 - EC340 Spring2011 ProblemSet9 1.

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